The Triumph of Monetarism
Summary of DeLong's The Triumph of Monetarism? Background 1. Macroeconomics dominated by two schools of thought: the New Classical school, grounded in rational expectations (and real business cycle theory), see also RBC, and the New Keynesians. 2. Features of New Keynesian research: - friction preventing instantaneous market clearing (price stickiness) - monetary is better than fiscal, for stabilization - business cycle fluctuation is ups and down around trend, not below potential output level situation - long term analysis of fluctuations favoring economic policy rules over policies based on analyzing cycles in isolation - limits of stabilization policy --long lags and low multiplier in fiscal policy. Research Question 1. Monetarism was intellectually and politically triumphant by the late 1970s, yet today it has almost vanished as a school of economic thought. What happened? Hypothesis 1. Much of monetarist thought became incorporated into the New Keynesian research program. Method Literature survey on history of (five type of monetarism) 1. First Monetarism a. Fisher's MV=PY b. Money long-run neutral, and thus is ineffective as a policy tool for long run economic growth/prosperity. c. Short term, money changes observed to sometimes affect output and employment. No good theory for this, and the long run result must be true: All changes in M end up as changes in P in a 1 to 1 relationship. d. Thus, Fiscal and monetary policy useless, or even counterproductive, for macro stabilization: "can only create a false prosperity containing the seeds of a long and deeper future depression." e. When the Depression hit, this way of thinking implied policy makers should do nothing. f. Both Keynes and Friedman believed this framework was inadequate for the same reason: By taking the long run as the only standpoint, this framework offered no way to explain the observable short run behavior of money, output, and employment. The long run was when anything interesting economically, such as the Depression, was over! 2. Old Chicago Monetarism (oral tradition) a. concern over Velocity, inflation lowered the opportunity of holding money --> swings of velocity, during boom/recession. b. unstable bank's deposit-reserve ratio and depositor's deposit-currency ratio --> difficult control of Ms. 3. Classic Monetarism (that acquire hegemony power :-) ) a. Features, from various authors: stable Md function, limit on stabilization, rule based policy, nat rate of unemployment's close to average rate of unemp, potency of (more) effective/powerful monetary policy b. Related to Q on study guide, I think this is the answer. And why it leads to so called New Keynesian synthesis, note that all features are the same as the feature of New Keynesian above mentioned. c. The outside New Keynesian synthesis features of classical monetarism are:1. Program of Monetary Reform to eliminate fluctuation in Velocity --> 100% reserve banking requirement, 2. Central Bank independency -- isolate the State induced monetary policy. Less state intervention is not Keynesian, of course. 4. Political Monetarism a. It's just the Classic Monetarism theories redux --> sufficiency of money growth policy as indicator of demand (fiscal policy is just ineffective), stable velocity, easy to control money stock - b. it is empirically false in 1980 and 1990s. Conclusion As seen from point 3, classical monetarism is equal to new keynesianism --> new keynesian synthesis. There is a triumph of monetarism against RBC, but not against New Keynesian.